Helen of Troy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 12 speakers on the call.

Operator

Hello, and welcome to the FEMSAQ Second Quarter 2023 Results Conference Call. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded. And for the duration of the call, your lines will be on listen only. However, I will now hand you over to your host, Juan Fonseca, to begin today's conference.

Operator

Thank you.

Speaker 1

Good morning, everyone. Welcome to FEMSA

Speaker 2

The plan today is a little different than usual because we

Speaker 1

are joined by Jose Antonio Fernandez, Our Executive Chairman of the Board and CEO, who will open the call with some important messages. After that, Paco Camacho, El Pena Garza and I will carry on with the Q2 results as we usually do, followed by Q and A. Jose Antonio, please go ahead. Thank you, Juan, and good morning to everyone on the line. Before we begin, I would like to thank all of you who have recently reached out to us We have messages to support for Daniel after the news of his stepping down as CEO of FEMSA to focus on his health.

Speaker 1

We truly appreciate your kind words and well wishes, which we have relayed to Daniel. We are grateful to Daniel for his many meaningful contributions to strategic direction and high performance standards Of our company, always with a steady hand and clarity of purpose. Daniel always makes it easy for He's keen to rally behind him, follow his lead and achieve excellence. And beyond strategic acumen of business success, Daniel embodies the values that define FEMSA. Thank you for everything, my friend.

Speaker 1

I wanted to be here today to take a few minutes of your time given the unique circumstances of this recent leadership transition To convey a few important messages. 1st, I am now fully engaged with our senior leadership team To continue implementing our strategic priorities including FEMSA forward, we have already executed several important steps And we are totally committed to the strategy to continue unlocking shareholder value. You should therefore expect full continuity, focus A smooth transition. That is very important for us. That should have very clear.

Speaker 1

2nd, my dual role as Executive Chairman and CEO is not permanent. At FEMSA, we believe that those roles should be separate, and we plan to go back to that when ready. We know you have questions regarding time frames, but please bear with us while we carefully go through this important process. We will let you know when we have news to report. Finally, I want to recognize our team.

Speaker 1

I am fortunate To be surrounded by a truly remarkable group of leaders and advisers that are working hard every day to keep growing and keep delivering On the potential of our great company, the opportunities ahead of us are very significant and compelling. And every business unit We announced today are a good example of what we can achieve. So with that, I will let Paco, Eugenio and Juan to discuss the results in detail. Thank you very much for your trust and confidence. Paco, please go ahead.

Speaker 2

Thank you, Jose Antonio. Good morning, everyone. Let me begin by updating you on where we are Regarding FEMSA forward. During the Q2, we achieved 2 important milestones. First, we were able to divest PEMSA's remaining investment in Heineken, retaining only a residual amount of shares To meet our obligations under our existing exchangeable bonds.

Speaker 2

And second, we signed an agreement to divest Our minority stake in Jetrail Restaurant Depot. These milestones have come ahead of plan and under favorable conditions, Allowing us to keep our momentum as we continue to pursue the FEMSA Forward structure. As you know, FEMSA Forward is fully aligned with FEMSA's customer centricity and our broader strategic priorities We're driving long term growth increasingly enabled by digital capabilities always within our core business verticals And with a disciplined approach to capital allocation. With that in mind, we can report that our 2nd quarter results Show the continuation of the positive trends seen at the start of the year, fully consistent with those strategic priorities I'm making progress towards the target set by each business unit's long range plan. Moving on to the results and beginning with proximity, it will be helpful to talk for a minute about their own long range plan and the Four priorities around which it is built.

Speaker 2

Number 1, strengthening the core. 2nd, developing new growth avenues. 3rd, developing multiple successful formats and 4, growing the footprint beyond Mexico. Looking at TOXO's 2nd quarter results Through this lens, we see they made great progress strengthening the core as same store sales growth Once again, stellar surpassing 15%, split evenly between average ticket and traffic and reflecting a structural improvements In segmentation of the store value proposition. We again saw a particularly robust performance in the 1st, I'm gathering consumer occasions, further supported by favorable weather during the month of June.

Speaker 2

Continuing with the positive news of a stronger quarter, new store growth accelerated and was robust once again With Mexico and LatAm providing the highlight, we're adding 444 new stores during the quarter And almost 1400 during the past 12 months. In fact, once we include stores opened by Grupo NOS in Brazil, We added more than 5 office stores for every day of the second quarter. Moving on to the long range priority of growing beyond Mexico. During the quarter, Grupo NOS continued to advance ahead of plan, with revenues increasing over 200% year over year, allowing us to increase OXXO's footprint in Brazil at a dynamic pace of almost 300 net new OXXO stores during the last 12 months. Still on Proximity Americas, but along the priority of developing multiple successful formats, Bara for the highlights, Achieving 23% same store sales growth.

Speaker 2

For its part, Proximity Europe again saw Good local currency top line growth and overall positive profitability trends, driven by a stronger pricing, growth in food traffic As well as the higher contribution of Ballora's food service outlets. Just as importantly, we continue to advance on Changing best practices across organization with the focus of settling of setting the right conditions for future growth and value capture. Our sales operations continued the stable trends we saw at the start of the year, Reflecting foreign exchange headwinds from a strong Mexican peso, but again delivering robust margin function at the growth and EBITDA level, capitalizing on the benefits of having an integrated Latin American platform working as a single organization. Additionally, during the quarter, our Shell business continued to drive to consolidate its competitive cost across markets, But particularly Mexico, where it increased its store footprint by 12% against a challenging competitive landscape. For its part, our fuel business also had a stable performance with the strength in the corporate wholesale business Setting softness in its retail platform.

Speaker 2

Regarding digital, the number of active users for SPIN more than doubled year over year to reach 5,700,000, while active monthly users for our premier loyalty program also more than doubled, reached 15,800,000, While 24% of OXXO Mexico sales are now associated with the program. We continue to privilege acquisition of higher quality users, while we make progress fine tuning the use case. Value propositions, unit economics and monetization strategies for each of these products as well as we look to ensure long term value creation for the ecosystem. In terms of financial implications, during the quarter, we deployed close to MXN 1,000,000,000 on growing this business, Roughly in line with the previous quarter as well as budget as we have indicated. Finally, Coca Cola FEMSA Volume grew across all its territories and surpassed 1,000,000,000 unit cases for the first time during a quarter.

Speaker 2

That combined with cost optimization and expense efficiencies allowed margins to expand sequentially. In addition, COF accumulated more than US1 $1,000,000,000 of sales during the first half of the year through their omni channel platform, Juntos Plus, Which represents a significant milestone in cost digitalization journey as it strengthens and deepens the connection with their customers. Before I turn over the call to Eugenio, I want to touch briefly on capital allocation, a topic That we are aware is very much on the minds of many of you today and a key component of our FEMSA forward strategy. As our cash levels continue to rise, we are accelerating our analysis to determine the optimal capital requirements to support the short A medium term growth of our operations, organic and inorganic, because that will help us fine tune the levels of capital that we We'll then return to shareholders. This is high priority for us, and we will keep working on it together with our board To have a more specific framework for you as soon as possible.

Speaker 2

And with that, let me turn it over to Eugenio.

Speaker 3

Thank you, Paco, and good morning to everyone on the line. Beginning with FEMSA's consolidated quarterly numbers, Total revenues during the Q2 increased 18%, while income from operations increased 8% compared to the Q2 of 2022. On an organic basis, total revenues increased 9.5% and income from operations increased 4.5%. Net consolidated income was ARS 8,926,000,000, reflecting higher income from operations, A Ps. 9,400,000,000 non operating income mostly reflecting the divestment of FEMSA's minority interest stake in Jetro Restaurant Depot And a decrease in net interest expense during the quarter.

Speaker 3

These were all partially offset by a non cash foreign exchange loss of ARS 6,500,000,000 Related to FEMSA's U. S. Dollar denominated cash position has impacted appreciation of the Mexican peso and a net loss of discontinued operations of ARS 3,900,000,000 Driven by the market value fluctuation of the Heineken shares underlying our outstanding exchangeable bond. Moving on to discuss our operations and beginning with Proximity Americas. We added 444 new units during the Q2 To reach 1391 net new stores for the last 12 months.

Speaker 3

This quarter's strong expansion set us ahead of our yearly expansion target And it underscores OXXO Mexico's strong growth potential. Having said that, we will stick to an objective of 900 net new OXXO stores just in Mexico for the time being And the expansion curve for the rest of the year should be smoother than usual. OXXO same store sales were up 50.3% for the 2nd quarter. This was driven by an increase of 7.4% in average customer ticket and a strong 7.4% growth in traffic. This underscores the solid performance we saw across OXXO's categories throughout the quarter, but especially by the strong showing of the gathering and thirst locations.

Speaker 3

Gross margin was 41%, reflecting a lower contribution from financial services, which more than offset healthy commercial income dynamics. Income from operations increased 18%, while operating margin decreased 20 basis points compared to the same period of 2022 to reach 10%, Reflecting an increase in labor expenses stemming from the labor reforms in Mexico. At Proximity Europe, As Paco mentioned, revenues increased 8.4% in local currency to reach almost ARS 11,000,000,000 reflecting a recovery in traffic and ticket driven by improved Customer Mobility. Gross margin was 42.1%, reflecting a mix effect driven by the positive performance of Ballora's Foodservice And B2B businesses, while operating margin was 2.9%, reflecting better operating leverage, partially offset by an increase in expenses Driven by inflation pressures. Moving on to FEMSA's health operations.

Speaker 3

During the Q2, we expanded our drugstore count by 81 net additions To reach a total of 4,267 units across our territories at the end of June and 369 total net new stores for the last 12 months. Revenues increased slightly while same store sales decreased an average of 3.7%. However, as was the case last quarter, It is important to note that on a currency neutral basis, revenues grew 14% and same store sales increased almost 8%, Driven by good performance at most of our operations, but partially offset by a demanding comparison base in our operations in Chile and Mexico. Gross margin increased 170 basis points in the quarter, mostly reflecting positive margin dynamics across our operations, especially in Mexico. Operating margin decreased 10 basis points, reflecting an increase in labor expenses in most of our markets.

Speaker 3

At OXXO Gas, Revenues increased 9.3% and same station sales grew 3.2%, reflecting a dynamic competitive landscape across our footprint. Retail volumes were again complemented by robust pickup in corporate and wholesale activity. During the quarter, gross margin was 12%, While operating margin was 3.9%, reflecting tight expense control offset by increased labor expenses. Moving on, Coca Cola FEMSA also delivered a strong set of results in the Q2. Total volume grew 7%, driven by growth all across its territories.

Speaker 3

Total revenues increased 7.2% and operating income grew 13.4% as operating margin expanded by 50 basis points to reach 13.9%. You can listen to the replay of the conference call held yesterday. Finally, our Envoy Solutions Total revenues increased 23.1 percent while relative to the Q2 of 2022, reflecting some of the acquisitions we did last year Together with solid execution, while operating margin contracted 120 basis points impacted by extraordinary expenses Related to synergy capture across the platform. That's it from my end. With that, we can open the line up for your questions.

Speaker 3

Operator, please?

Operator

Thank you. We'll now take our first question from Thiago Bottellucci at Goldman Sachs. Your line is open. Please go ahead.

Speaker 4

Yes. Hi, good morning, everyone. Thanks for the presentation and taking the question. Just before we get started, just want to share once again Our best wishes for Daniel and also welcoming back Jose Antonio on your double hat position. Good luck on the forward look.

Speaker 4

I have two questions that I'd like to explore. The first one, it has to be capital allocation, right? Obviously, we understand That you need to be cautious on the communication and on the movements, right? But putting in perspective where you are Versus what you communicated on the Tantapower plan, you are already running at roughly $5,000,000,000 of excess cash position in the balance sheet, right? So unless there is any large M and A in the horizon, which I don't think is the case, growth shouldn't be a bottleneck Or an overhang form a stronger capital distribution, right?

Speaker 4

And this is not to mention the organic cash flow that the business is generating. So I would just like to understand internally, right, what is the kind of debate and different views that you are facing That is still preempting and set up on shareholders' return. This is the first one. And the second one, we know there is scope for pretty decent expansion of OXXO, right, not just in Mexico, But across other regions potential, including the U. S, when we look into Mexico and Brazil, which are both Countries where you already have a pretty different footprint and rolling up.

Speaker 4

Your continuing stores overlaps your bottling operations, right? How important it is for you to develop aqua domicers in a country to also have somehow a footprint Internally on the beverage space, this is just to imagine how the growth scope might move into new regions. Thank you very much.

Speaker 3

Hi, Devo, it's Eugenio. Thanks for the question and we'll definitely send along your thoughts to Daniel and the team. With regards to your first question on capital allocation, fortunately, we are well ahead of the divestiture program that we announced back in February. So we are in that privileged position that you mentioned of already being well below our 2 times net debt to EBITDA target. So We are having discussions, very serious discussion at the Board level as to kind of what kind of framework for a capital allocation We are going to be implementing.

Speaker 3

Having said that, you can feel comfortable that we will be looking at several alternatives. 1, And for the most part, as you know, organic growth within the businesses that we decided to focus on with FEMSA Forward Still continues to be strong and we feel over the next 5 or 6 years, we could deploy $7,000,000,000 or $8,000,000,000 easily in terms of new store openings, Further additions to our Coca Cola bottling operations, etcetera. So there's plenty of room to put capital to use in low risk projects at very high returns to continue on the growth. Having said that and to your point, most of this will be funded with just internally generated cash and we'll still have this cash left over. So Our second part of the capital allocation will be reserving some amount of capital, again, within the construct of a 2 times net debt to EBITDA capital structure at the end, But reserving some capital for strategic optionalities that might arise again within the core businesses that we have identified And also sticking to very tight financial return guidelines, so that the capital allocation into new initiatives, whether it be At Proximity, whether it be at COF, whether it be in Latin America or elsewhere that they stick to not only strategic criteria, But also very strict financial and value creation criteria.

Speaker 3

And then finally, I mean, there is a very high likelihood That after allocating this capital to strategic initiatives, there will be some capital left over And we will consider what the best way to return that capital to shareholders will be, be it an ongoing share repurchase program, A bigger cherish purchase program and or extraordinary dividend. So those are all of the things that we are discussing at the Board level. We will hope to have So more clarity for you hopefully by the end of the year, if not very early next year. But again, we're being patient. We're focusing right now On executing on the divestment part of the FEMSA forward strategy and then shifting our attention to this, but you should feel comfortable that through the combination of organic, inorganic And capital returns to shareholders, we will continue to, I mean, of course, make sure that shareholders Can maximize their value in their stake in FEMSA.

Speaker 3

And at the end, when we reach this final two times net debt to EBITDA A ratio you will be exposed to a portfolio that has fantastic growth and cash flow generation Characteristics to it. So that's it on capital allocation. I don't know Paco, if you want to take the other question on the expansion of OXXO and beverages.

Speaker 1

Yes. Actually, Thiago, on the second question on OXXO, can you repeat it? The line wasn't totally clear when you phrased the question the first time around.

Speaker 4

Sure, Paco. Sorry. The question is, When we imagine you penetrating other regions with convenience stores right with OXXO, how important it is for FEMZAR for the operations Also to partner with some sort of beverage distribution being on beer or on soft drinks.

Speaker 1

Thank you, Thiago. This is Juan. I mean, actually, on the proximity side, we are really agnostic, Right. I think, obviously, in Mexico, we have the legacy of our beer business that eventually became Heineken and that was the reason why obviously, there was for a number of years, We only sold the Heineken portfolio, but when we started the OpEx in Brazil, as you well know, you obviously work with Amber As well as Heineken, but you don't I don't think we need to be a special partnership with a beverage company in every place that we think about Opening retail, I mean, obviously, in Europe, we don't have such a setup, and it should not be a prerequisite. Obviously, we know everybody in the beverage business.

Speaker 1

We are close to many of them, but it's not a prerequisite and you should not See it as either an obstacle or a facilitator necessarily. I mean, the two things really go separately.

Speaker 4

That's great. Thanks, Juan. Thanks, Ovenu.

Operator

Thank you. We'll take our next question from Bob Ford at Bank of America. Your line is open. Please go ahead.

Speaker 5

Thank you very much. Good morning, Jose Antonio, Paco, Eugenio Juan. Please note that our prayers are certainly with Daniel and his family. Paco, you mentioned the MXN 1,000,000,000 in digital investment. Can you discuss areas of focus in terms of functionality, how you're thinking about the development roadmap And where the consumer and small business credit resides in that sequence?

Speaker 2

Yes. In fact, the investment that we're doing is thank you, Bob, for the question. But As we have announced before and we have been pretty consistent with that investment, we are at this stage, a Part of that is basically going into the expenses of operating that business and growing it. So we have put significant amount of money on making sure that we have the right team, that we Bring the right people. And so those are parts of the operational expenses that are taking part of that investment.

Speaker 2

As we move forward And we continue developing the 3 verticals in digital that we have told you guys over time. First, our fintech or Wallet, second, our loyalty program and third, enabling the B2B business. What we are creating is really an ecosystem. So at this stage, what we are focusing on is making sure that the consumer experience of those Consumers navigating through the different services and through the whole ecosystem improves With every experience and with every use of the platform. So when you look at the spin, for example, I mean, clearly, as you said, at this stage, We are focusing on getting a better use of the platform Through the services that we have today, which is basically the wallet and the team has become increasingly knowledgeable Of the different use occasions for each of the cohorts that they are they have identified, Both demographically, so geographically and geographically, and that will continue to be the case.

Speaker 2

2nd, optimizing the expenses. So when you look at the cost Of acquiring new users, it has reduced significantly sequentially over the last quarter. But importantly, we also know that Once we have established these new these services, It's very likely that we will need to move to additional services such as insurance, such as credit, But that is in the pipeline, but it's not something that we are rushing into without making sure that the first stage Of the business is completed successfully, which is making sure that they have the right consumer experience. Then when it comes to the loyalty program, it's similar. We feel confident on the service we're providing today that we said the tender is at 24%, 25% right now.

Speaker 2

We are seeing already the improvement of OXXO sales behind the loyalty program. So making sure that we Continue improving the consumer experience, and that is important for us to the same for the partners that we have today. As you know, we have O'Lari, for We are focusing on improving the experience for consumers behind that, and that is the focus at this stage.

Speaker 3

The other thing I would add about just so you don't get scared with this COP1 1,000,000,000 per quarter operating loss at digital Is that digital is generating revenues at the proximity division as well. So for the overall FEMSA ecosystem, The cash burn is less than what you see reflected in the loss in the others column for us. So right now there is a transfer price That's being assigned because of the use of the retail network, but overall the cash burn in the ecosystem is like you just see there.

Operator

Thank you. We'll now move on to our next question from Ricardo Alves at Morgan Stanley. Your line is open. Please go ahead.

Speaker 6

Yes. Thanks, everyone. First of all, of course, all the best to Daniel. And Jose Antonio, it's nice to hear from you again. I think that your message in the beginning of the call on The same support plan was really important, so I appreciate that.

Speaker 6

First very quick follow-up Eugenio. You mentioned the buybacks, the dividend policy See our eventual extraordinary dividends. Qualitatively speaking, is there kind of a preference you guys are leaning towards Here, I don't know you've been studying these issues a while. Is there anything that you guys learned perhaps on the buyback front? Anything that you could share terms of what you have learned so far this year, when you're discussing those topics.

Speaker 6

And then my question my other question is More related to OXXO, obviously, very impressive same store sales. The gross margin was also Good. But we had a little bit of a higher expectation for EBITDA. So can you guys expand a little bit more on the SG and A dynamics For OXXO specifically, labor obviously has been a factor in Mexico. But Is there anything else that you care to highlight?

Speaker 6

I don't know if maybe the stepping up of the new store Openings that you had from the Q1 to the Q2, I don't know if that's relevant enough to move the needle On the scale front, but just a little bit more thoughts on the SG and A level. Thank you so much.

Speaker 3

Sure, Ricardo. Thanks for the questions. First, with regards to buybacks, as you can tell, we can we have been looking at all sorts of academic research about kind of what the reaction is for the market for either a large dividend or repurchase program etcetera and they can all tell you kind of what you want to hear. At the end of the day we're focused on generating value For the shareholders in using that excess capital to generate as much value. So I think the question there is obviously a tax element that we're looking closely at, But I mean mostly comfortable at this point that taxes will be relatively agnostic with regards to either choice we make, But we're still perfecting that.

Speaker 3

And I guess the question is going to depend number 1 on what's the size Of the return of capital program and then what the market dynamics and the valuation of the stock is at that moment in time and how much we can achieve On one versus the other at specific prices to ensure that we are generating as much value on a per share basis for the FEMSA shareholders who do decide To remain with us for the long term. So again, we are looking at all the academic studies and again Taking them with a grain of salt, but focusing more of the analysis on what generates the most value on a per share basis for the FEMSA shareholder. And then on the OXXO, on the SG and A front, there are several things going on there. I mean on the one hand, starting with the gross margin, you do have A little bit of a mix effect with less services and more merchandise and that obviously brings gross margins down. The other effect as you know has a lot to do with the loyalty program where we are reserving for the points that are being earned there a little bit.

Speaker 3

That's more than being offset with increased traffic and increased ticket size. So we're happy to have a lower gross margin, but more sales. So that obviously helps. And then on the SG and A side, again labor reform, I would say the biggest factor. But you're right, it's not only the new store openings That you see it ramping up in the Q2, but it's all these other initiatives that we are pursuing the Prontos, the opening of the Barras and the opening of A lot of initiatives that cost a little bit more at the beginning, we're implementing new operating models in the stores to be a little bit more efficient On the supervisor front, we are investing in cash recycling machines to have higher cash availability for cash out In the OXXO stores etcetera and all those initiatives are being funded heavily during the 1st part of the year.

Speaker 3

Some of them cannot be capitalized, they need to be expensed and that's You see a little bit of the softness in the 2nd quarter numbers. But for the most part, I would say it has to do with the labor reforms.

Speaker 2

Just to add to that, it's clearly, as he said, the 2 main factors is the labor cost and second, The new store opening, but I think that it's also important to know that as you look at the numbers in OXXO, the fact that the sales are increasing is also helping to absorb the cost. So when you look at quarter to quarter, we have a reduction in administrative expenses as a percentage of revenues, for example. So the performance of OXXO continues to be Very dynamic and cost as we grow the revenue.

Speaker 6

Very helpful, gentlemen. Just one Quick, I think I misunderstood, but is the loyalty still affecting OXXO? I understood that it was not. Okay. Thank you so much for the time.

Speaker 3

Thanks, Ricardo.

Operator

Thank you. We'll now move on to our next question from Alan Alanis At Santander, your line is open. Please go ahead.

Speaker 7

Thank you so much for taking my question and great to I want to ask a question regarding the long term vision and long term strategy that you have or long term vision that you have for the next 5 years for the company. Overall, I think that will be a good opportunity for all investors to hear directly from you in terms of how do you The company will be different in 5 years from now. And specifically, if you could touch regarding the Relationship with the Coca Cola Company and Coca Cola FEMSA. As many of you in this call know, this year, there's Celebrating 3 decades of lifting Coca Cola FEMSA in 1993 and now you have the largest Coca Cola bottler by volume. How do you foresee the relationship and the ownership that you have with Coca Cola FEMSA in the next 5 years?

Speaker 7

And that will be my question. Thank you so much. Good morning, Pablo.

Speaker 2

Yes, Alan, thank you. This is Paco. I will just start Answering your question and then I'll pass it on to Jose Antonio in case he wants to add something. So on the first part of the question related to the Next 5 years, I would like to go back to what we have discussed a couple of times, which is the long range plan exercise that we put together Recently, and that we have explained to you in a number of occasions. And clearly, that continues to be our guiding light for the next 5 years.

Speaker 2

Each of the businesses have very thorough, very complete 5 year plan that they developed, They are working towards those plants in 2023, and they will continue to do that in the next years. Part of the results that you are seeing is precisely Behind the LRP that they have developed, so you should expect that, that is not going to change. We are obviously, as in any process such as long term planning, we will review the plans just Check that if anything changed in terms of context, in terms of competitive activity, etcetera, and so you should expect that, that might happen. But clearly, we have Very strong plans in place, and each of the businesses will continue to do so. At FEMSA level, As we aggregated the plant, I mean, we clearly saw the opportunities to continue our target of doubling the size of the business every 5 years.

Speaker 2

So that shouldn't change either. So we feel confident about the LRP, and you should expect that we'll stick to them Both at the business level and at trends level. Part of it, as you know, is finishing and making sure That we continue deploying the FEMSA forward strategy, and you will hear news about that as they come along, But you shouldn't see any surprises on that.

Speaker 1

Here is Jose Antonio. Thank you, Alan, for your question. On behalf of what we foresee for the next 5 years in Coca Cola FEMSA, I can tell you and you know that I've been around with Coca Cola and FEMSA Since Roberto Boisueta and we cannot be happier of the The situation of our relation with Boca Cola today, we have a complete aligned critical success factors of our executives, We have a common perspective of what is coming. We want to continue growing. We just won the Candler Cup From it was assigned to Buenos Aires.

Speaker 1

Our team in Buenos Aires did a superb job, and we won it again as many, many other times. We are very happy. We see a very good and profitable relation for the future with Coca Cola.

Speaker 7

Got it. So some of the capital deployment can go also in expanding the franchise if needed. I know you've talked that Maybe Coca Cola Finsa doesn't need that money, they can use their own capital. But if needed, you will continue to support the expansion of Coca Cola Finsa.

Speaker 2

Yes. Alan, this is Paco. POF is always looking for inorganic opportunities. They will continue to do so, and obviously, we will support them if needed. But There is no change in that.

Speaker 2

They have been always actively looking for opportunities.

Speaker 1

And I think, Alan, this is Juan. I mean, the Nature of the relationship and the clarity that we now have in terms of the business and the cash flows, as you know, is prompting The business itself to invest, right? And you heard the team has called yesterday talk about their CapEx. I mean, they've been talking about it for months. They're investing more this year and the next couple of years than they ever have in adding capacity and just growing the business.

Speaker 1

So It really is looking like we have a time ahead of us when the

Speaker 2

co fronts are going to

Speaker 1

be deploying more capital. And as Paco just said, We would be ready to step up under the right conditions for M and A.

Speaker 7

Got it. Thank you so much.

Speaker 3

Thank you, Alan.

Operator

Thank you.

Speaker 8

We'll We'll now move on to

Operator

our next question from Louis Willard at GBM. Your line is open. Please go ahead.

Speaker 8

Hi, guys. Good morning. Thanks for taking my question. Welcome back, Jose Antonio and I joined my colleagues on wishing Daniel, the best and his family, of course, as well.

Speaker 1

So this one is

Speaker 8

a bit philosophical. I would love to pick your brain and ask Which characteristics do you think the next FEMSA CEO should have, especially as a relevant part of the FEMSA forward strategy would likely be Already underway, if not completed. And I have another one on spin, very, very short one.

Speaker 1

Well, thank you, Luis. Well, the characteristics We would love to find first of all, we would love to have Daniel back. We don't know. We hope. We're still praying, and we have I hope that he will recover and will come back.

Speaker 1

Otherwise, we would look for as you know, this job, Daniel's job is he's a CEO or that coordinates CEOs. So he has to have a very good follow through He'll be able to hear from the whole team ideas and mix them. He has to complement and push I'll motivate the CEOs of the different divisions. We are in a very different path that we had in the last 20 years. I mean, today, we have a very nice problem of having a lot of cash.

Speaker 1

We have another very nice problem of lots of opportunities geographically to develop Latin America, U. S. And even Europe organically with stores. So this is this has to be a matter of priorities, A matter of studying very well the projects and deciding which one goes first. There is not A special order of the priorities because we don't know what we could find as opportunity anywhere in the world, But we will follow-up the growth of all the divisions as we speak.

Speaker 1

The potential of digital is great. We need to know more about this. This is obviously a new venture for us, completely different than operating Beer or soft drinks or retail, but the CEO should be Very open to new ideas, very cautious on how to invest and which projects to pursue. But I hope Daniel I insist Daniel come back. That's my expectation.

Speaker 1

Absolutely. We hope that

Speaker 8

to happen. Thank you, and thanks for the answer. So another one, just very quick. I think I may have asked

Speaker 1

This is in the past, but is there any relationship that you might have detected between the ongoing lower share

Speaker 8

of financial services at OXXO, it's Now the Q1 happens. And the strong advancement of spin users, I'm thinking that if there's a relevant Share of financial services that are now being made or transacted through the app at a lower profitability. Thank you.

Speaker 1

Hi, Luis. This is Juan. I think in the long run, you should expect To see a migration of some of the physical users moving to digital. But I think what we're seeing Today is still is much more related to kind of the vagaries and the ups and downs of the relationship with the correspondent banks. I mean, As you know, we've had a couple of banks that reduced their exposure to OPPO.

Speaker 1

They're coming back, and we are obviously need to be very Careful about the fees. With inflation, how do you manage your fee structure? So I don't think that the changes that we're seeing right now is necessarily driven by the secular trend Of physical becoming digital, I do think it's still much more related to whether one of our big banking partners left or is coming back or What's happening to the fee structure? So I think it will happen, but I don't think we're seeing that yet.

Speaker 8

Understood, Juan. Very clear. Thank you.

Operator

Thank you. We'll take our next question from Elisabeth at JPMorgan. Your line is open. Please go ahead.

Speaker 9

Hi, guys. Thanks for the space for questions here and obviously echoing the good wishes there for Daniel. So the question that we had was more if we could explore a bit on the other retail formats in Mexico, particularly around Barra. Maybe if you can comment a little bit on what the outlook is for the rollout, any short term targets that you can share there? And obviously, any colors there around How profitability size evolving CapEx requirements, all of that, that would be highly appreciated.

Speaker 9

Thank you so much.

Speaker 2

Yes, Felicia, thank you. Thank you for the question. Indeed, I mean, Vara is one of the formats that The OXO team is exploring as part of their multi format strategy. And Bara, frankly, has been doing A terrific performance during the quarter. So when we look at the results, if I'm not Mistaken, the results were 22% ahead of year ago, strongly in the digit.

Speaker 2

The traffic increased by 12%, And we continue to see store sales at plus 12%. The Private label, which is a strong part of the value equation, it is also performing significantly well. And they continue to improve all the operational aspects of the stores, reducing the inventory, reducing the operational cost, We are applying the success that Doxo has had on the segmentation. And importantly, they also continue Improving the number of the opening of the stores. So right now, there are 200, bar stores, in 300 Bar stores, in particular, in the center part of Mexico.

Speaker 2

And our idea is that we'll continue with that expansion in strongly in the years to come, once again, making sure that we first continue the geographic areas that we are, and we slowly expand to others And continue fine tuning the value proposition. But we are very confident that this state that we have cracked that value proposition, and it's a matter of making So that we gradually expanded in other parts of the geography in Mexico, specifically Mexico.

Speaker 3

If I may complement with regards to the unit level economics, I think with the gross margin structure that has been achieved Through the different categories value prop and private label penetration, we have been able to, I mean, reach Unit level economics that from a marginal perspective in terms of the store investment and the operating model that can give us I mean returns on investments well into the double digits. And again at the 4 wall level they're reaching the mature stores are reaching and in the contribution that we originally set out for the rebranded not the rebranded, but the reformulated value prop 3 or 4 years ago. So we're very comfortable that as the scale grows, distribution centers fill up, etcetera, that we will be Achieving, I mean, much better EBIT margins than what we're seeing right now and that the marginal dollars that are being invested here are earning, I mean, spectacular return. We're comfortable again that the unit level economics on Bara are working out either as or better than expected.

Speaker 9

All right. Thanks for that. Super, super helpful. And if I may, just to follow-up on that on the point there on private label. Do you have any Sense or any level that you can share with us around how much private label actually represents there within the format?

Speaker 9

Thank you.

Speaker 2

Yes. When we look at the total sales, our private label is at around 21% Of the sales in store, but then obviously, it changes depending on the categories. So it goes very high when you look at Fresh product, for example, It is around 27%. What general merchandise is also higher at 27%. So it changes, but this is an important part Of the value proposition.

Speaker 9

Okay, perfect. Thanks for that and congrats on the results guys.

Operator

Thank you. We'll take our next question from Rodrigo at UBS. And before that, kindly be reminded that this is limited to one question each person. Thank you. Rodrigo, your line is open.

Operator

Please go ahead.

Speaker 10

Sure. Thank you. Good afternoon good morning, it's Paco, Cristiano, Juan Eugenio, well, we'll limit my questions to 2 to 1. I would like to explore your thoughts on NOxO Brazil. It looks like you finally cracked the Formula there delivering very impressive results in terms of same store sales.

Speaker 10

Two questions here. I would like to Your thoughts. The first one is, do you envisage with the midterm or even next year in a scenario where perhaps you could be like in a stage in Mexico At some point, like opening 1 store per day, would you see that happening in Brazil, for instance? And the second one, if you can, I mean, it appears to me most of the stores in or even all of the stores have been OXXO? Looks like in DJ Venture, pretty much what everything we heard is coming from you guys.

Speaker 10

Just if you can remind us or share with us, I mean, what's essentially The contribution shift from your counterpart in from Raizen and the JV, that would be great to hear and congrats

Speaker 1

Hey, Rodrigo, let me take the first part and then I'll let Paco Compliment. I think on the 1 store per day, I mean, I don't want to put our colleagues in the hot seat, But that's actually what they did during the Q1, right? I mean, if we remember that in Brazil, they used a different fiscal year. They have their The end of the year is at the end of March because of its harvest, the saffre here. So our Q1 was their 4th quarter, And they actually opened like 90 stores during that quarter.

Speaker 1

So it is doable. Now is that a run rate for the full year? No. But is that possible? Yes, I think in the short to medium term, that's the kind of growth that we are looking for.

Speaker 1

I'll let Paco talk about the partnership, which is really going very, very well.

Speaker 2

Yes, yes. Thank you, Rodrigo, for the question. Look, I mean, 1st and foremost, we are extremely happy with the relationship we have in Brazil. We are We're extremely happy with the way the joint venture is working. We are extremely happy with the, I will call it learnings that we have and that we share between the two entities.

Speaker 2

When you look at Brazil today, we have a very strong base of office stores right now, We also have a very strong base of the selected stores. They have our partners have over 1500 stores In Brazil, and they opened 35 units in the last quarter. So at the end of the day, we have an ecosystem of Stores in Brazil between the Select and the OXXO that are very powerful, as you know, they are experts on the fuel side. And it's something that we plan to even learn more as we move forward with our expansion plans in other places. So I mean clearly, the joint venture we have there is going ahead of expectations, and we have a strong relationship With our partners that we plan to continue building in the future.

Speaker 3

If I may add to Juan's earlier point.

Speaker 1

Sure.

Speaker 4

Go ahead. I just want to

Speaker 3

add to Juan's earlier point. You have to remember the 90 stores we opened in their last quarter We're just in Sao Paulo and Campinas because we just have one, I mean, DC in place. Eventually, we'll be in Rio, we'll be in other places. So again, I'm trying to be a little bit more aggressive than what Juan is and I'm sure I won't put the Brazilian colleagues on the spot here. Once we have 3 or 4 different areas where we're saturating The market simultaneously we should be able to reach that growth.

Speaker 3

And again also just to complement on Paco's point, you have to remember The first three years of the joint venture were run by someone who came from Raizen. So I mean the local know how, the local expertise Has been invaluable in terms of rolling out the value proposition in Mexico and we will continue to rely on them For learnings that are being put to use in the region.

Speaker 10

Understood. That was very clear. And I totally agree it certainly Expectations. You're already breakeven point there, right? Or still negative operating income?

Speaker 10

So if you can share with us that would be helpful. Thank you very much.

Speaker 3

Sure. At this point, given that they are also a public company, we'd rather not I give out the numbers. Having said that from a free cash flow perspective, given how much we're expanding at this point, we're still free cash flow negative, but in a good way. What I can say is that the economics are of the business are better than what we expected when we originally started 3 years ago In all income statement lines.

Operator

Thank you. We'll move on to our next question from Ben Theurer at Barclays. Your line is open. Please go ahead.

Speaker 1

Perfect. Thank you very much, and good morning as well. Congrats from my side. Just wanted to dig into recent dynamics At OXXO, clearly, we saw a very strong second quarter just continued a very healthy combination between ticket and traffic. I was wondering if you could explore a little bit of how much of maybe that traffic was driven just weather related, people weren't going into stores Because of the heat, buying certain beverages and so on and what the trend into the Q3 and how you're feeling about the traffic more recently.

Speaker 1

Thank you. Ben, this is Juan. I mean, we were talking a little bit about this Even last quarter, we were talking about the gathering location, the first location. I remember making a comment in the call 3 months ago about beer being very relevant now that we I mean, we've opened fully the territory, all of Mexico to both big families of brands I'm beginning to move the needle even though the opening to the API portfolio happened during Several years ago or began happening 3, 4 years ago, we already were under COVID and people weren't really living their lives normally. But now we are, right?

Speaker 1

And so people are getting together a lot more, consuming a lot more. And so we again see those trends where the beer category and the soft drinks category and the snacks category and the liquor category are all Performing very, very well. Now I think if we look at it intra quarter, certainly, the month of June was the strongest. And you point to the right reason. I mean, the heat the weather that we've had for June And the better part of July, obviously, has been an additional tailwind to the consumption of beverages.

Speaker 1

So it looks like July kind of Took off where June ended, so continue to see good trends. But again, I think the broader reason is people fully going Back to living their lives, I mentioned the other time, concerts and fairs like the one in Aguascalientes, really all over Mexico, Just people gathering and consuming normally where we have not for several years. That will be my comment.

Speaker 2

Yes. No, and then this is Paco. The only thing that I will add to that is that when we look at traffic, It has been improving, as you know, sequentially for a few quarters now. The strong performance that we are seeing, the additional good news is that It is coming behind the general merchandises. I mean, basically, every single segment of the store is growing and adding Traffic.

Speaker 2

And that is being reflected also on the market share. I mean OXXO continues to gain market share, And that has to do with the basic and the core value proposition of the store. So that is the good news. Yes. All the segmentation work that is being done is paying its dividend.

Speaker 2

And I guess that the consistency of it is what is helping the traffic. And that's why we believe that in the quarters to come, hopefully, we'll continue to see the same.

Speaker 1

Okay. Thank you very much.

Operator

Thank you. We'll move on to our next question from Alvaro Garcia at BTG. Please go ahead.

Speaker 8

Hi, good morning. Thoughts and prayers with Lanyan. Just one quick one on spin. I was wondering You're seeing higher transactions per user. In the release, you mentioned for increased transactions per month.

Speaker 8

But I was just wondering if Within certain cohorts, you're seeing, just higher balances and just higher movement on a per user business. Thank you.

Speaker 3

Yes. Hi, Alberto. Thanks for the question. On SPIN, yes, we are seeing different cohorts, especially the newer ones being more prolific in terms of their transaction volumes As they find different use cases for the product. Again, cash in cash out continues to be the main one, but what's really picking up now is peer to peer, Which is what we want to because it creates the network effect and it creates stickiness to the product.

Speaker 3

So I would say that for the most part we are increased In transactions per user, the way we would want to see them and as people see the functionality of peer to peer And also the payments that we were seeing being done on an analog basis, the services, etcetera, That is also being I mean you top up once in the month and then you use it to pay for 3 or 4 services online instead of having to come back to the cashier And paid for 3 or 4 services over the course of the month. So I think it's moving in the right direction as we expected it. There is, I mean, some shift As in one of the other questions with regards to what that's doing, I think overall to the financial services line, but having said that I think from an economic perspective, it's not extremely diluted, but more importantly, we are having more engagement in the platform, which is at the end of the day what we want.

Speaker 8

Great. Thank you very much.

Speaker 3

Yes, Severo.

Operator

Thank you. We'll now move on to our next question from Sergio at Citigroup. Please go ahead.

Speaker 11

Yes. Hi, it's Sergio Matsumoto from Citi. Thank you for taking my question. And also my thoughts and prayers are with Daniel and his family. My question is on Premier, the loyalty program.

Speaker 11

When you look at the strength of that program to drive traffic into the stores, How does that compare against those that were non digital or analog, as you just mentioned a few minutes earlier, Such as the services and the payments and the mobile phone minutes top up. That's my first question. And related to that is, does the ubiquity of OXXO stores play a role Under how does the Uniqlo play a role in the acquisition and retention in these digital platforms? Thanks.

Speaker 2

Yes. Thank you, Cecilia. This is Paco. I will take the second part of your question, I'll start on the first and then, Eugenio, you can complement me. But I mean, clearly, the OXXO Stores play a very, very important role in the in both Spain and the loyalty program.

Speaker 2

I mean, having the physical store and the approach that the team is taking is that a digital approach, which means The service providing on the FinTech side and on the logistics side are leveraging strongly on the So both on the acquisition side, but importantly also in terms of the consumer experience and the type of offers and programs that we put together. So there is at this stage, the intention is to continue leveraging on the physical presence of the store. And the teams were very close together because I'm clearly the store when we talk about the store, it basically means The people that work in store, they are the ones that many times have to convey the messages in terms of whether the consumers are going to use the loyalty program or not, There's a special offer that they should be taking a look at. You need to know that they are, for example, this is just an example, but there are dedicated coupons That people can use, but they only have them available in the application, in the app. So many times, at least at this stage, the cashier is the one that is going to suggest The user to go and look into the applications to see if there are any coupons.

Speaker 2

So that link between the store and digital It's strong today, and we expect it to get even stronger in the future. And that takes us to the first part Of your question, which is that OXXOPREMEA, at this stage, It's a big part of the transactions are still on the physical side. So people go there and they have their phone number And they access their account through the phone number to the cashier. More and more, we are seeing that Users have the application and they do the transaction through the application. But at the end of the day, we believe that it's going to be a combination of both Moving forward.

Speaker 3

Yes. If I might add just In the ubiquity point, according to Banco de Mexico, in all of Mexico, there are 62,000 ATMs and only 28,000 or 29,000 of those 62 are actually outside of a bank branch. If you think about OXXO, in OXXO we have 21,000 ATMs. So technically we've got I know 40% of the outside of bank APMs in Mexico and if you go to the more rural areas of Mexico Probably have to be the only ATM in town. So clearly that is a significant portion of the value proposition especially in a cash Which economy in an informal based economy like Mexico is.

Speaker 3

So clearly that is I think the main driver of the value proposition. Our job obviously is to take That advantage and turn it into a unique user experience that flows across not only Spain, of course, with payments and peer to peer, etcetera, But also with the loyalty program to drive that symbiotic relationship between the digital and the physical store. And right now On loyalty, again, it's still early days, but I mean you saw in the press release, we're at 24% tender. So 24% Of all the sales of OXXO are being done through loyalty program and these again we're still running some numbers, but these customers are running Tickets and traffic and purchases that are significantly higher than they otherwise would have been to a comparable cohort without the loyalty program. So I think this symbiotic relationship again between the physical store, the digital Wallet and the loyalty program is causing exactly the kind of network effect that we wanted to have.

Speaker 11

Thanks, guys.

Operator

Thank you. And we'll take our last question from Hecht Tanaya at Scotiabank. Your line is open. Please go ahead.

Speaker 4

Hi. Thank you for your time. Apologies if I get disconnected. I'm having some issues with my line. Just wanted to say first our thoughts and financials are with Faneo.

Speaker 4

We are wishing you all the best. Also, the question I have is related to Tempur Forward. In the announcement, it was mentioned the potential I would like to know how you Can you comment the supplier of the traditional channel? If you have some clarity on the economics or how you would organize your And the red trucks with the Coca Cola Company. In the end, I mean, did you believe that we could eventually start to think of TEMSA

Speaker 2

Hector, Hi, this is Paco. Thank you for your question. The line was breaking up, so I will try to answer the best I can. But Basically, we continue to believe that there is a lot of opportunity of enabling The traditional channel and solving the key pain points that for many, many years they have had. I mean, first of all, I mean, clearly, The pricing is a concern for that.

Speaker 2

And that is the almost a price event. Making sure that they have the right price It's something that it's a very important part of the value proposition. On that You can imagine that I mean, clearly, we believe that we are well equipped to solve that 1 or 2 to at least address it simply because we have A very strong commercial relationships on the OXXO side. But there are a number of other pain points that this segment has suffered over the years. One is the availability of products and the delivery because today, what they have Most of the time, they have to go and look for the product themselves, open store late because they have to go to the wholesalers or the Central de Avastos or other places To supply their products, and that means that they lose sales as they go and they come back, they have to pay for transportation, etcetera.

Speaker 2

So having an ecosystem in which you can actually receive the product, place the order the day before or 2 days before, once you have closed your operation for the day And then receiving it in full at the right price is basically going to solve a very big And the second one, which is not minor, is that every time they go and buy, they have to buy full cases. And that is

Speaker 7

an issue. I mean, that is

Speaker 2

an issue because many times they only need to buy a few units. And given that they don't have access to credit, they don't have Access to any source of financing, they have to work with their own working cap to pay for these things. And if they buy a full case of something that is going to take 2 months to rotate, you can imagine they have money trapped that they cannot use for their things. In reality, our ecosystem can actually offer them to buy by the unit, simply because OXXO has been doing that by supplying their stores by the unit. So that's not a minor thing.

Speaker 2

It's a difficult thing to do Because you have to make money as you do it and also is an expert doing that. So clearly, we are planning to continue Exploring all the alternatives we have to provide the platform that will solve all these issues for our Traditional channel. The traditional channel continues to be an important segment for the retail in Mexico, We expect it to continue to be as such. So clearly, us playing a role on helping them is going to be important.

Speaker 1

I think I would just add, this is Juan. And I know this is a question that has come up on the Cofemta side as well. Just remind everybody that Still early days in terms of how we build this thing and how roles and responsibilities and capabilities and interactions, A lot is still to be defined. So it's looking very promising, but it's still early days.

Operator

Thank you. There are no further questions in queue. I will now hand it back to Juan for closing remarks. Thank you.

Speaker 1

Thank you, everyone. Thank you, obviously, for all your kind words again regarding Daniel. We will definitely relay them To him,

Speaker 2

he might very well be listening to

Speaker 1

the call, so maybe he already heard you. We're always available as always, myself and the team. Jose Antonio, if you want to also you're going to sign off, but have a great end of

Speaker 2

the week and weekend guys and we'll be in touch.

Speaker 1

Thank you, Juan. Thank you for your time. Thanks for the interest on the company as well. I will try to be At least on a couple of this kind of conference calls per year, not on all of them, unless there is an important news that we have I will gladly come. And also, you should know that through Juan, you can contact us All the time.

Speaker 1

We will stay in touch. Thank you very much, and see you soon.

Operator

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Continue to stay safe. You may now disconnect.

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Earnings Conference Call
Helen of Troy Q2 2023
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